Josh Cantwell: Hey, guys. Welcome back. Hey, it’s Josh, and I am excited to be back with you guys and, frankly, talk about one of our property updates. Back in April of 2021, we bought and closed on Waterford Grove. This was a property where the loan sponsor or the deal sponsor was a friend of mine named Shane Carter. And about two or three weeks before closing, Shane said, “Hey, man, I could use your help. We’re looking to raise some equity. We need another loan sponsor. We need another deal sponsor. Are you interested in kind of co-sponsoring this deal and co-syndicating this deal with me?” And I said, “Yeah. Let me take a quick look at it.” And by the time we decided to get involved, which was about four days later, we had meetings with the contractor, which is Jorge Abreu at JNT Construction. We had meetings with Shane. We had meetings with Ian, who is one of the family offices that got involved that co-sponsored the loan, as well as brought in some equity. And we thought, “Okay. Let’s get involved. Let’s see if we can help Shane and JV on this deal.”

To give you an idea, Waterford Grove, 552 units. Let me just kind of set this up for you. Purchase price was $70 million. The capital that we’re going to put into the property, the rehab was $3.5 million, plus our closing costs and prepaids and escrows put us all in for roughly $79 million. And it’s the biggest deal we’ve done so far. And it’s us, Shane, Jorge, Ian, another JV partner that’s involved as well. And so, all in $79 million. We were able to get an acquisition loan for $68.75 million. And we were able to secure another $10 million of GP and LP equity to round out the $79 million all-in number. The loan-to-cost we were able to get which was great was almost 90%. So, all-in for $79 million and an acquisition loan for almost $69 million. You know, if you’re in Cleveland or the Midwest, that’s not normal but when you’re in a high growth market like Houston, Texas, where this is in play, we’re able to get a pretty high loan. The other thing that the lender was able to do was they were going to give us an original loan more like 80% at 4% interest and then separately bring in some more GP/LP equity and then the blended cost of capital would have been higher.

What we decided to do was they decided to make us a new term sheet, a new loan amount for almost $69 million but kind of blend the two together, the equity and the debt, and then raise the total loan to almost 90% but also raise the interest rate to 5.3%. So, you see that on larger deals. You definitely see that with larger capital stacks where a lender who could be a family office or could be somebody who wants both the debt and the equity to blend that together and to make a new term sheet and call it all debt but a higher interest rate so that their blended rate of return, their blended interest rate is much higher. So, for us to get the blended interest rate of 5.3% but a much higher loan-to-value was actually better than lower debt with pref return, pref equity. And so, when we closed on Waterford Grove, one of the main reasons that I wanted to get involved was because our general contractor. General contractor is Jorge Abreu with JNT Construction. I’m partners with Jorge in a 216 unit in Oklahoma. I’m also partners with Jorge in 104-unit down in Houston. And Jorge does a really good job of the capital improvements, the CapEx.

To me, the people that I like to underwrite the most is actually not the owner. When we do a JV deal, the people that I want to underwrite the most is the property manager and the CapEx construction guy, you know, the contractor, because at the end of the day, the owners have a vision for what they want but the property manager and the contractor are the ones that actually make it come to life. So, Shane is a great partner of ours but Shane lives up in the Northeast. He doesn’t live anywhere near Houston. So, when I consider getting involved, it was really more about, okay, who’s going to actually be on the ground? Who’s going to be on the ground doing the deal and actually handling a property management, handling the CapEx? That’s the most important thing to me. And so, we were able to interview asset living and ultimately they selected a property manager. Her name is Lisa. And I was so excited. I was down in Houston last week visiting the property. I actually held a mastermind down there on-site in the management office. It’s a large conference room there. We had about 45 people in our mastermind group that met us down there.

We did a two-and-a-half-day mastermind on-site at Waterford Grove. Shane was great about letting us host it there and walk the building. And I was so excited to get there and meet Lisa. Lisa was the property manager. She’s got a crew of 12 people. Actually, she’s one of 12. She’s got a crew of 11 people underneath her. She’s got five what she calls in-the-house property managers, assistant property managers, and leasing agents. And then she’s got six out-of-house maintenance guys, repairs and maintenance. So, when you think about our model, what I typically do is I look at a building that’s 200 units and a 200-unit building is going to need a lead property manager. It’s going to need an assistant property manager/leasing agent. And then it’s going to need two maintenance guys. Okay. So, 4 total headcount, 4 people for 200 units, 2 in the house and 2 out of the house. And so, I look at Waterford Grove, which was 552 units but what we’re doing is we’re actually converting a number of units into 1 bed, 1 bath. So, there’s actually 66 units that were formerly 3-bedroom large units that we’re actually converting into 1 bed, 1 baths.

So, we’re taking 66 units and converting them and so we’re going to add more units to the complex. And so, there’s going to be an additional roughly 35 units added to the complex, which is going to push us up close to 600 total units on the complex. So, when I was talking to Lisa about the matrix of the management team and the maintenance crew, I was excited to hear her say, “I’ve got 6 in the house.” So, 600 units 6 in the house, and 600 units 6 out of the house. So, I was really happy to hear that. Also, Lisa has been used to managing major buildings. She’s managed a thousand-unit complex so not only is she managing Waterford Grove but she’s also managing another complex that we own called Spring Brook Lofts. It’s also in the spring branch submarket, and that was a major turn. That was kind of a C- building in kind of a C+, B- area that we’re renovating the entire complex with the intention of flipping that one, that 104-unit, and I’m excited that out of the 104 units, we’ve already hard turned 58 of them.

But back to Waterford Grove. So, the plan was that right when we bought it, immediately, we would patch, seal, and stripe the driveway. We would do the exterior repairs on the trim, landscaping upgrades, a dog park, scrape and paint and repair the stairs. That was going to cost us $355,000. The plan was to do that immediately and that’s all done, which is great. That’s all finished. On top of that, we had planned on doing these unit conversions right away, and the unit conversions was another $1.5 million, roughly $22,000 to $25,000 for each of these conversions, meaning we’re taking a large 3-bed, which is about 1,400 square feet. We’re chopping it in half and creating two 1-bed, 1-baths. So, it was great. Last week when I was in that complex, I was excited to see that a lot of those conversions have been done. In our latest update that we deliver to our limited partners, our passive investors in early February, about six weeks ago, there were 140-unit turns that were completed in the building and 26 of what we call C2 conversions. These are the conversions from a 3-bed to two 1-bed, 1-baths. Twenty-six of those are done.

And so, we’ve already added 26 additional units to the rent roll because we took one unit, split it in two and we could get a lot more rent for those. So, I mean, to give you an idea on the leasing, which I have in front of me, if you look at a 3-bedroom, that leases out for about $1,300 to $1,400 a month. We converted those three-bedrooms into two 1-bed, 1-baths. Those are leasing out for roughly $900 to $1,000 a month. So, with the same square footage, would you rather get $1,300 to $1,400 a month in rent or would you rather get $1,800 to $2,000 a month in rent? So, we’re able to increase the rent about $600 over that same square footage. So, that’s a big deal. That’s a big part of our plan. In addition, we’re also going to do 38 what we call heavy turns or hard turns that were in original condition. That’s at about $7,500 a unit and then 448 units we’re going to just do a light upgrade, basically, backsplash, fixtures, paint, about $2,500. So, really important there. So, total budget equals about $3.5 million.

The great thing is that when we produced our last investor update just again about six weeks ago, we had already spent $1.7 million in the capital improvements. And when I say we, what I really mean is Jorge Abreu. So, Jorge and I have become good friends, and he’s got a tremendous portfolio of his own. He’s done about 6,000 units. He just sold off some units. And so, he owns about 4,500 units right now, and he’s also a commercial general contractor. So, super excited to see that we’ve spent almost half of the entire renovation budget in just the last eight months. You’ve got this massive complex. It’s on 27 acres and the dog park’s done, the exterior landscape’s done, the exterior painting is done, the metal staircase repairs are done, the brick column repairs are done, and 104 of the unit terms are done including 26 of the conversions from 3-beds to two 1-beds, which is pretty outstanding work really.

And so, on top of the fact that Jorge is really kicking butt, when I’m at Lisa, I’ll talk to Lisa, really got involved with her, talk to her about her experience, she just really, you can tell, runs a very tight operation. I was in the leasing office, which is a massive building, about 8,000 square feet and she’s got three or four girls sitting at the front desk. She’s got maintenance guys in and out of the house all day. You got six maintenance guys. Imagine that, six maintenance guys working on maintenance tickets all day, every day doing makereadies, doing maintenance, utilities, fixing light, just everything that’s involved there. And so, it’s been less than a year but our construction’s half done. And the plan here is the income when we took the building over was about $7 million. The goal is to push that all the way up to $11 million roughly five years from now and then to try to keep because it’s such a large building to keep the expense ratio down. Usually, on a really, really large building, you can start to push that expense ratio down. The rule of thumb, of course, is 50% expense ratio.

But on a really large building, you can push down a lot of those expenses so you can actually get your expense ratio down closer to 42% or 43% or 44% down because your salaries, you have these economies of scale for salaries, for wages, for admin, for maintenance and repairs, for landscaping contracts, services, all these different things, landscaping, snow removal. The cost of it because it’s so big, the cost per unit gets pushed down. And so, because of that, we’re going to be at roughly 42% expense ratio, which leaves our net operating income at about $6 million. So, you take that $6 million. And right now, these deals in this market are really trading at a really low cap rate. Obviously, if interest rates go up, cap rates will go up eventually. They’re not going to go up right away but, eventually, that puts us where this building is worth over $110 million. Depending on how long we hold it, depending on how much Houston continues to grow, which it’s obviously growing, it’s like it’s on fire right now, could push the value $105 million, $110 million, $115 million over the next couple of years.

And so, I think some of the lessons that I want to leave you with is this. Number one, co-sponsoring and co-syndicating deals is a fantastic business model but what really matters is not the other owners. What really matters is the boots on the ground, who’s the property manager, who’s doing the construction. Okay. That’s very important. Number two, hiring what I would call an enterprise-level property manager is very important. There are some very large property managers, including Asset Living, including Lincoln that manage 100,000, 200,000 units. Because we use Asset Living on this property and because Lisa works at Asset Living, gave me a tremendous amount of confidence in doing this deal. And then now, after 10 months of owning it, I feel really good about it but it comes down to those boots on the ground. The construction, I already mentioned Jorge a couple of times, right? It’s not easy to pull off a $3.5 million budget but Jorge and his crew is doing an amazing job so that gives me a lot of confidence.

The fact that Shane is having an owner meeting with Lisa every Wednesday and actually when I was there when I was on-site last week on Wednesday, I was meeting with Lisa, we were walking the property, Lisa’s like, “Hey, I got to step out for a minute. I got to go have my owner meeting with Shane.” Fantastic. On top of that, number four, we produce quarterly investor updates for our investors, which is a PowerPoint with video, P&Ls, balance sheets, all that type of stuff that gets out to investors every quarter. So, super excited about that. So, there’s a lot of things that go into this kind of partnership but, look, I met Shane because of our social media presence. Shane brought me in because Shane knew I was a good sponsor, a good co-sponsor, good syndicator. I did the deal because of Lisa and Jorge. So, that gives you an idea of some of the things that have to go in to a really good co-syndication, co-sponsorship, and joint venture opportunity.

[CLOSING]

Josh Cantwell: So, there you have it, guys. I hope you enjoyed that case study about 552 Waterford Grove, which is eventually going to be about 582 Waterford Grove. If you enjoyed this case study, learned a few things, jump into your phone right now, Spotify, iTunes, wherever you get your podcasts, leave us a five-star rating and review. And also, if you want to learn more about multifamily investing, whether you’re an active operator, whether you’re a limited partner, go to JoshCantwellCoaching.com and apply to be part of our mastermind group. Right now, we’ve got about 70 members in the group. We meet three times a year, plus we have calls twice a week with the group and we’re underwriting deals, offering on deals. Matter of fact, I just got a text from one of our members before I started this podcast that said, “Hey, Josh, by the way, the mastermind group is amazing. Thanks for caring so much.” So, that came from Kaz. So, Kaz, thanks so much for that text message. I appreciate it. And, guys, we’ll see you next time on Accelerated Investor. Take care.